What is a leveraged buyout (LBO)?

The leveraged buyout term (LBO) refers to the purchase of a company through external debt. Together with all the money, the complete sum is the one that finalizes the purchase of said company.

As leverage, assets (such as goods) of the company to be acquired are used mainly, this allows to ensure the purchase and the money that has been lent. This type of operation is very common among investors inprivate equity.

The risk of the LBO is twofold: in the first place, it affects the company itself having to introduce foreign debt, without knowing how it will proceed to pay it (pay it off) in the future and if it will be able to do so. This does not mean that it does not pay off easily, as each company will do so in one way or another. On the other hand, we have the risk assumed by the agents who deposit their capital. It is logical, since these investors are investing in capital that, as we say, we do not know how it will be returned for sure.

In some cases, the fact that there are leveraged purchases leads to a reduction in management personnel, directly affecting the objectives that have been set by the company. If this fact affects cash flows, the company could be involved in certain problems. To prevent this from happening, it is important that cash flows can be predictable and consistent, and that said objectives can be susceptible to sales and with a high expectation of growth.

The risk assumed in leveraged purchases will be attributed both to the actions of the agents and to the actions of the company. It must take care of all the actions it undertakes, extrapolate them to the long-term dimension and ensure that everything is carried out so that financing through this type of practice is carried out successfully.

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